You must sell losers to satisfy the tax man

Arthur M. Louis

Published
4:00 am PDT, Sunday, September 28, 2003

Q: Several years back I bought a few hundred shares of stock in WorldCom which, as you know, is now in bankruptcy. I have the shares, worth about 7 cents apiece, in my brokerage account, plus a few shares of a spun-off company, priced at about 32 cents. I have made a long- term gain on another stock and would like to offset it with my loss on WorldCom. For tax purposes, do I need to actually sell one or both of the losers, or can I simply write them off on my tax return, as the sales transaction fee would be greater than any proceeds?

A: I've received many queries essentially similar to this, although the company names vary.

I'm afraid the IRS requires that you actually sell the shares, because there still is a market for them. That rule makes sense. Imagine the complications if you wrote off the shares for a tax loss, retained ownership, and then the share price recovered. Yes, the commission may gobble up all the sales proceeds, and you might even have to pay extra as well. But the nice part is that you can add in the commission cost when figuring your tax loss.

Measuring tax bite

Q: Can you help me figure what the tax bite will be when I sell my house? I bought it 18 years ago for $192,000, and I have added about $60,000 worth of improvements and upgrades. The likely selling price in today's market is about $640,000.

A: Although the market value of your house may be $640,000, you probably will have to pay a brokerage commission of about 6 percent, as well as closing costs -- such as a county transfer tax, escrow fees and various other incidentals -- totaling upward of $2,000.

Let's estimate the net selling price at $599,000. Your cost basis, including the improvements and upgrades, was $252,000, so your net profit would be $347,000. Of that amount, assuming you are single, $250,000 presumably is excluded from the capital gains tax, so $97,000 would be exposed to taxation.

The $250,000 exclusion for single people applies if you have used the property as your primary home for at least two of the five years immediately preceding the sale. The exclusion is $500,000 for a married couple, under the same guidelines.

So, on $97,000 of taxable gains, the maximum tax would be $14,550. That is a substantial sum. If the sale goes through this year, you might need to make an estimated-tax payment before the Jan. 15 deadline, using IRS Form 1040-

ES.

Otherwise, you could be socked with interest charges for not pre-paying enough of your 2003 tax liability. Generally, you are obligated to pre-pay at least 90 percent of the current year's liability or 100 percent of the amount you owed the previous year, whichever is smaller.

Another thing: You should take a look at IRS Publication 523, which fully explains the tax rules applying to the sale of a home.

How now, Dow?

Q: The Dow Jones average has been struggling to stay above the 9,500 mark lately. How long ago did it first reach that figure?

A: When the Dow, amid much hoopla, topped 10,000 for the first time in March 1999, I would never have guessed that there would be any plausible reason to pose a question such as yours more than four years later. The sad fact is that the Dow topped 9,500 for the first time way back on Jan. 6, 1999.

Since then it has gone nowhere -- on balance -- and we all might as well have kept our cash in money-market funds. The Standard & Poor's 500 index has performed even more poorly, falling about 20 percent while the Dow was merely flat-lining.